Yellen, Bernanke see the US economy avoiding a recession

US Treasury Secretary Janet Yellen and former Federal Reserve Chair Ben Bernanke both indicated in separate remarks Thursday that they thought the US would likely avoid a recession.

“For a long time, I always believed that there was a path to the soft landing, that it was possible to bring inflation down while maintaining a strong labor market. And to me, that's what the data suggests has happened,” Yellen told CNBC in an interview.

The Fed, Bernanke said during an appearance at a virtual event hosted by Fidelity Investments, has built "a soft landing scenario, which is kind of the best of all possible worlds with jobs back to normal, inflation back to normal, interest rates back to normal.”

But Bernanke also warned of the risk that unemployment doesn't stabilize where it is and begins to go higher.

"That would happen if the economy began to slow, which we have not seen yet,” he said. "But certainly it is a possibility if people begin to lose confidence or depending perhaps even on policies of the new administration."

In such a case, the Fed would "have to respond,” he added.

Yellen underscored that the job market has cooled as the unemployment rate has drifted up, though it is still low by historical standards, and that inflation has come down considerably.

She noted the “last mile” on inflation is slower, with a lag in housing prices coming down. She thinks housing costs will fall further as market rents have come down.

“Hopefully, this is going to turn out to be a stable situation with the Fed supporting continued strength in the labor market and inflation has come down considerably,” Yellen said.

Yellen and Bernanke are the two figures who preceded Jerome Powell as Fed chair, with Yellen serving in that role from 2014 to 2018 and Bernanke from 2006 to 2014. Yellen became Treasury Secretary in 2021.

Their comments come as fresh data on economic growth showed the latest second quarter gross domestic product estimate was 3% annualized growth in the US economy.

This third estimate confirmed that economic growth in the second quarter was higher than the 1.4% growth in the first quarter.

Meanwhile, jobless claims data for the week ending Sept. 21 signaled a decline in the number of people filing for unemployment benefits. The Department of Labor saw 218,000 unemployment claims filed, coming in below Wall Street's expected 223,000. This marks the lowest level since mid-May.

The Fed decided last week to cut rates by 50 basis points, its first easing since 2020.

Bernanke said he thinks the Fed could cut by 50 to 75 basis points more this year, implying that the central bank could cut by a larger 50 basis points in one of the remaining meetings of the year.

The median projection among existing Fed officials is for two more cuts of 25 basis points each.

He sees another 100 basis points of rate cuts next year, in line with officials’ median projection. He said that that would bring the Fed to around 3%+ on the fed funds rate, and that would be close to where the Fed seems to believe neutral is — the level on the benchmark policy rate that neither spurs nor slows economic growth.

“That’s, in some sense, the target,” said Bernanke. “Now, whether they'll get there or whether they'll be derailed by new information, new shocks, remains to be seen. But that's where they hope to end up, I think, as this process continues.”

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